How does getting a cheque in the mail every four months for doing absolutely nothing sound to you? Well, if you are anything like me (and the majority of other people on this planet) then it sounds pretty good. So where do you sign up? The place where you can achieve this starts with a little something called a DIVIDEND. If you were to look up the definition of a dividend on Wikipedia.org you would come up with this answer "Dividends are payments made by a company to its shareholders. When a company earns a profit, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders of the company as a dividend. Paying dividends is not an expense; rather, it is the division of an asset among shareholders." So to summarize, this is telling us that some companies will take a chunk of the money that they make, and hand it out to the investors who own it's stock. You might be wondering why a company will hand out its hard earned money to its shareholders, this in itself is a heated debate between certain professionals. I do not want to get into this right now, so just know that not all companies pay out dividends, and that it is generally the larger more stable businesses with little room to grow that pay out steady dividends.

Companies will usually pay out dividends on a quarterly basis, but you will find some that pay out once a year, or even every month (usually in the case of an income trust). Just because a company pays out a dividend doesn't automatically make it a good opportunity to buy. Just the same, a company that pays out a high dividend percentage doesn't always make it a good buy either. When looking for a solid dividend based investment we want to concentrate on a few things. One of these, and I would say by far the most important one is a long history of steadily increasing the amount dividends it pays out. When a company can afford to increase its dividend payouts, it shows that its management believe that future cash flows will be enough to maintain the new dividend level. Numbers on a companies balance sheet are one thing, but dividends must be payed out with REAL money, so this tells you that as long as the company is not taking out debt to pay off their dividends, then they are generally a sound place to start looking as an investment.

To put this in perspective lets look at an example of why this is important. Lets say you buy 100 shares of company ABC Inc. and at the time of your purchase the stock is selling for $10, and ABC Inc. pays out $0.05 every quarter to its shareholders in the form of a dividend. This means that you will be getting $0.20 a year per share just for owning the stock (or $20/year for doing nothing) which translates into a 2% return. Now, 5 years go by and the stock is worth $20 but more importantly the company has reliably increased its quarterly dividend payout by $0.01 every year. So, now you are making $0.10 per share every quarter, which is $0.40/year or $40. So, if you wanted to figure out your return based on the dividends, you would take your initial purchase price of $10 and divide that by 0.40 which is equal to a 4% return. Another 5 years go by, and ABC Inc. continues to reliably increase their dividends every year by the same amount, you are now looking at a 6% return, or $0.60 or $60 /year. See where this is going? Every year, you are making more money on that initial purchase, and you don't have to do a single thing. And notice that the current price of the stock has nothing to do with your dividend return, this is important to note, because if you buy a solid company for its dividends then you should never have to worry about the market fluctuations because the current price of the stock does not affect dividend payouts. So as long as the company is still payout out its dividends you are laughing all the way to the bank.

Some might say that $60 a year is nothing, but remember the previous example was based on a $1000 investment and was kept very simple for illustration purposes, and it is not unheard of, of dividend based investors getting a 15%-20% return over time from some of their investments. This does bring us to my next point, one way to get the most out of your dividend based investments is to reinvest your dividend payouts back into the companies stock. This means that with time, you own more and more shares of that stock, which means you will make more and more money every quarter from the payouts. To quote www.dividendgrowth.org "According to a report by Ibbotson Associates, dividends have accounted for 40% of the S&P 500's total return from January 1926 through mid-2001. In Canada, dividends have accounted for approximately 60% of the total return from 1956 through mid-2003. Globally, during the past 30 years, re-invested dividends have provided a larger portion of world stock-market total returns than price appreciation. While stock prices have appreciated by a factor of almost 10 since 1973, total returns have increased by some 24 times." Still think that dividends aren't important enough to look into?

So far we know to look for companies that have a long history of increasing their dividends, and are not taking on debt to pay for these dividends. What else should we look for in a company? Well, if you were to just use the previous two points you'd do pretty good for yourself, but there are more ways that we can make sure we are doing the best that we can. It is important to wait for a companies price to fall to the point that its selling at a bargain. So once you have your list of 'stocks to buy' wait for the market to do one of its many nose dives and buy up all the stocks you can. Buy low and Sell high right? well sort of, our goal here is to buy low, and never sell.

I don't want to make this post too long, so I'll finish with one last tip. Try to buy companies that are as 'recession proof' as possible, I know that there is no company that is truly recession proof, but what we want to look for are companies that aren't affected as heavily by current economic situations. A good place to look for these companies are things that you use every day, and that even if you were in a recession you would still have to buy regardless. Examples of these kinds of companies are ones that make toothpaste, people aren't going to stop brushing their teeth just because the economy is doing badly. Another example is food, people have to eat right? or gas/oil people have to drive their cars to and from work. I think you get the idea. Look for companies that have strong brand loyalty and sell products that people need to use regardless of how the economy is.

I hope that I have succeeded in giving you an introduction to the very interesting subject of stock dividends. Look for a lot more information to be added to the site in the future and hopefully you will be enjoying the easy life of sitting back and collecting a steady passive income stream from your dividend based investments.